Is negative-gearing really worth it?

[PrimeCommercial]

Anyway, its an interesting topic and i suppose depends on ones beliefs and investing style.

Never a truer word spoken (or written)
I dare say that if everyone thought the same we'd have many more investors looking for the same property we're looking for.

My opinion,
Negative gearing is a vehicle that is available to get to and end point. The end point is 'financial freedom'. It suits some people and not others.
With income tax lowering, tax brackets raising and property prices stagnating, negative gearing is becoming less attractive

My position
I'm self employed and my wife is on maternity leave. I split income between my wife and I so we are both in a lower tax bracket and I make use of any and all tax/fringe benefits of being self employed.
Negative gearing for me is not an option for 2 reasons.
-Small tax rebate because of the amount of tax we pay
-With one income a drain on cashflow is not something that we're looking for at the moment.

 

[handyandy]

I think negative geared property is the anomaly and a relative recent phenomenon. I only have anecdotal reasosn for thinking this as i have heard relatives talk of buying IPs in the 70s, 80s and 90s and they all remember it being positive.

eg: Houses in western Sydney in the 80s were about 60k to 80k and apparently pretty easily rented for $100 - $120 per week.

Hi Evend

Your example is exactly for a neg geared property

Yes back then bought property between $60-80k and rents were 100-120, in fact I received $130pw, but the interest rate was 14%. This was in the day where the interest rate for IP's was an extra %

So rent was $6760pa but interest costs were $9520pa (14% on $68k), nearly $3k negative not including expenses etc.

They may remember it as positive because they had to use 25% deposit and are not taking into account the opportunity cost of that 25%.

I have bought both neg and pos property and my preference is pos

Similarly though, I doubt if I would have reached my current level of wealth without buying property that was negatively geared.

Cheers

 

[Mofra]

So people borrow & pay the shortfall not covered by rent, yes, hoping the property will go up - but why would you buy it otherwise with a view to selling it or living off it in one form or another ?

A source of cheap credit is a primary motivation for quite a number of people.

NG is really just a by product of investment in any asset class that is completed via credit, and residential property offers the cheapest credit.

 

[HiredGoon]

resi property could be positively geared in the late 90's. I think this was an anomally.

Those mad and crazy times when landlords didn't pay money for someone else to live in their house.

It's perfectly normal to see people bidding houses up beyond the cash they generate - it's a new era! It's like a ponzi scheme, where new entrants lose money and pay out old entrants who've lost money - but unlike ponzi schemes this one will keep going onward and upwards forever! There are no greatest fools, just fools who stay out of the market which doubles every 7 years!

 

[evand]

I'm not sure those figures are correct. I have nothing to base them on beside anecdotal evidence and snippets of conversation over the years.

I think figures of 10% gross yield and better were not uncommon.

edit: By the way, i'm not interested in positive gearing in itself to make money. I couldn't give a toss for the $50 or $100 per week. I'm interested in not having to worry about the properties while cap gain is doing whatever it is doing, i like set and forget property investing. I don't believe in property for cashflow.

Hi Evend

Your example is exactly for a neg geared property

Yes back then bought property between $60-80k and rents were 100-120, in fact I received $130pw, but the interest rate was 14%. This was in the day where the interest rate for IP's was an extra %

So rent was $6760pa but interest costs were $9520pa (14% on $68k), nearly $3k negative not including expenses etc.

They may remember it as positive because they had to use 25% deposit and are not taking into account the opportunity cost of that 25%.

I have bought both neg and pos property and my preference is pos

Similarly though, I doubt if I would have reached my current level of wealth without buying property that was negatively geared.

Cheers

 

[yorkiefish]

hi, i am probably a few months ahead of you on your journey and have read the pro's and cons of both and it really is individual to each person. there are some great tools out there to help you on your journey and to clear up some of the confusion. i have read marg. lomas positive cash flow (interesting) and have bought a positive cash flow propertie and a good 12% cap growth in a growing regional nsw city and its great. but also its worth reading michael yardney "how to grow a multi- million dollar prop. portfolio" even if you only want to buy one or two the basics are the same. also how to achieve wealth for life by tony melving and ed chan, they spell it out in very laymen terms.... these books can all be gotten from the old library so no costs there.... 1 other very good tool is defintley worth its weight in gold is " the somersoft PIA pack" which you put all the property info into and it tells you what the bottom line cost are and the pro;s and cons of each property with lots of variables.... cost $230 bucks.... good luck.

 

[HandyAndy888]

I personally have only ever had negatively geared properties in the last 4 years since I started investing. Has it been worth it? Bloody oath, on average, I worked out 17% pa. gain on the purchase prices AFTER all the deductions, with the bank's money. I think unless you have a lot of dosh sitting around somewhere, which most of us don't, you can virtually forget positively geared purchases. Will my investments turn positively geared? Yes, one day, I think my current IP will be +ve around...2014. But until then, I will repeat the cycle of aquiring -ve geared properties, turning them over, or buy and hold, depending on how tight I think I am with my cash flow. It's one system, and it's working for me.

Could I do better? Yes, I could be turning a lot of equity int o more property, but for the moment, in the current market, I will remain stagnant. Also, personal factors will always influence your capability to service cf- properties.

Good luck!!!

 

[SirR3D]

Have you considered lodging an income variation so this is recouped in each pay packet rather than in one block at a much later date?

My accountant suggested that but I like the idea of having a lump sum payment each year so i can either pay it off my PPOR or invest in other areas.

 

[keithj]

It's perfectly normal to see people bidding houses up beyond the cash they generate - it's a new era!

Yep, that's OOs for you

It's like a ponzi scheme, where new entrants lose money and pay out old entrants who've lost money - but unlike ponzi schemes this one will keep going onward and upwards forever!

It's nothing like a ponzi scheme.

Two of the attributes that define a ponzi scheme are that there is no real underlying asset and that a ponzi scheme will always crash to zero when the masses eventually realise that there is no real underlying asset.

Property fails both those tests. Property is a real asset that everyone wants and needs. It is unlikely to crash to zero.

 

[steveadl]

Yep, that's OOs for you
It's nothing like a ponzi scheme.

Two of the attributes that define a ponzi scheme are that there is no real underlying asset and that a ponzi scheme will always crash to zero when the masses eventually realise that there is no real underlying asset.

Property fails both those tests. Property is a real asset that everyone wants and needs. It is unlikely to crash to zero.

Keith, you obviously haven't been plotting enought hypothetical graphs and researching the web for obscure articles that can be vaguely refrenced.

C'mon Keith, get with the program! Stop doing, and become a theorist!

 

[topcropper]

I'm not sure those figures are correct. I have nothing to base them on beside anecdotal evidence and snippets of conversation over the years.

I think figures of 10% gross yield and better were not uncommon.

.

Handyandy is quoting his actual figures. And your saying you don't think they're correct?
But your baseing your beliefs on ,....
......"anecdotal evidence and snippets of conversation over the years".....

...???


10% gross yield in the 80's and 70's would not likely to have given positive cashflow property when you consider what interest rates and inflation were in those times.

I still maintain that the brief period in time of the late 90's when positive gearing was fairly common in cheaper property was an anomally that shouldn't really happen with growth assets like property. The one's who made a killing like Handyandy, Brenda, Steve McKnight etc, well good on them. I wasn't that smart, but I believe anyone hanging around thinking they will be able to do it again is kidding themselves, and worse, may miss out on ever investing in property again.

Just my views.


See ya's.

 

[HiredGoon]

It's nothing like a ponzi scheme.

Two of the attributes that define a ponzi scheme are that there is no real underlying asset and that a ponzi scheme will always crash to zero when the masses eventually realise that there is no real underlying asset.

I said it is like a Ponzi scheme in that new inflows of loss makers pay out the previous loss makers (capital gains for negative gearers). But yes, a better description is a bubble not a Ponzi scheme, because there is underlying value, but it is trading for way, way above that value.

 

[evand]

ok, thank you for your insight.

Handyandy is quoting his actual figures. And your saying you don't think they're correct?
But your baseing your beliefs on ,....
......"anecdotal evidence and snippets of conversation over the years".....

...???


10% gross yield in the 80's and 70's would not likely to have given positive cashflow property when you consider what interest rates and inflation were in those times.

I still maintain that the brief period in time of the late 90's when positive gearing was fairly common in cheaper property was an anomally that shouldn't really happen with growth assets like property. The one's who made a killing like Handyandy, Brenda, Steve McKnight etc, well good on them. I wasn't that smart, but I believe anyone hanging around thinking they will be able to do it again is kidding themselves, and worse, may miss out on ever investing in property again.

Just my views.


See ya's.

 

[Ausprop]

I said it is like a Ponzi scheme in that new inflows of loss makers pay out the previous loss makers (capital gains for negative gearers). But yes, a better description is a bubble not a Ponzi scheme, because there is underlying value, but it is trading for way, way above that value.

actually few things trade at fair value. you are lucky to find a stock that pays the cost of funds of owning it, nor art, nor gold, nor commercial property even. maybe your new slogan coul be a take off from kiyosaki, such as 'all assets are bad assets' or 'we buy cash' or....

 

[HiEquity]

I said it is like a Ponzi scheme in that new inflows of loss makers pay out the previous loss makers (capital gains for negative gearers). But yes, a better description is a bubble not a Ponzi scheme, because there is underlying value, but it is trading for way, way above that value.

Actually the real differentiator is that a Ponzi scheme is controlled by one promoter rather than being a function of the market. I don't recall all the real estate in the market being controlled by one entity... See the paragraph "what is and is not a Ponzi scheme" under:

http://en.wikipedia.org/wiki/Ponzi_Scheme

It would be much appreciated if people would stop referring to Ponzi schemes as they are irrelevant - if you think it's an asset price bubble then that is the correct term. BTW you really should be preaching to the OOs out there - haven't you heard property investors have left the market? Your work here is done - pop some champagne and celebrate!

I still maintain that the brief period in time of the late 90's when positive gearing was fairly common in cheaper property was an anomally that shouldn't really happen with growth assets like property.

I absolutely agree - to put on a theoretical hat, if such opportunities were widespread then every rational investor would take them up as they are just a licence to print money on top of the CGs, for "little or no money down". Stands to reason that the price should be bid up to the point where investors have to live through some -ve years before enjoying the happy days! Sorts out the sheep from the goats IMHO.

One of our strategies has been to buy properties in areas when we were suddenly able to as investors and we felt people like us really shouldn't be able to! Yes they have been -ve but prestige areas only get more prestigious the more cities grow. Has it been worth it? When there is "no money down" (through equity deposits) and more than doubling in value over three years, then yes! You take a risk with the -ve gearing but you gotta be in it to win it... If somewhere hasn't grown for quite a few years (rings a bell...) then I reckon it's a risk worth taking. However I also think we need some balance in the portfolio so we have some yield oriented plays in there as well.

 

[HiredGoon]

actually few things trade at fair value. you are lucky to find a stock that pays the cost of funds of owning it, nor art, nor gold, nor commercial property even. maybe your new slogan coul be a take off from kiyosaki, such as 'all assets are bad assets' or 'we buy cash' or....

For shares I think its fairer to use the earnings because some profits are re-invested than returned as dividends. Average PE of the share market is now 11.48 which is 8.7% earnings yield. Remember that companies over the long term have consistantly shown real profit growth grown while rents have tracked wages and inflation and outside of Sydney have gone down in real terms over the last 30 years. So you should pay a bit more for shares for their growth.

Here are some high yielders:
Diversified Financials = 6.60 = 15% earnings yield
Real Estate = 7.59 = 13% earnings yield

The big boys used debt to pay too much for real estate then booked gains from revaluing assets rather than cashflow. Living on equity and big real estate debt died a flaming death on the share market, and it'll die for the residential little investors too!

In many countries in the world and through much of history where there isn't belief in magical capital gains from the equity fairy, real estate is positively geared due to compensation for risk and effort - unblocking toilets, white ants, having the roof fall in, tenants trashing the place or not paying, etc etc.

 

[Ausprop]

some very true points HG

 

[keithj]

.

For shares I think its fairer to use the earnings because some profits are re-invested than returned as dividends. Average PE of the share market is now 11.48 which is 8.7% earnings yield. Remember that companies over the long term have consistantly shown real profit growth grown while rents have tracked wages and inflation and outside of Sydney have gone down in real terms over the last 30 years. So you should pay a bit more for shares for their growth.

As has been said many times before residential property investing isn't like other investment classes - a large proportion of the participants are emotional & irrational, so it doesn't behave exactly like the share market or any other market.

There might be a ponzi scheme or bubble in the racehorse market, the artworks market, antiques market or taxi plates. But I'm not smart enough to comment on them, I know very little about them & I don't invest in them..... but you're commenting on the res IP market .

The big boys used debt to pay too much for real estate then booked gains from revaluing assets rather than cashflow. Living on equity and big real estate debt died a flaming death on the share market, and it'll die for the residential little investors too!

The problem the big boys had was that they had short term loans that needed refinancing. That refinancing wasn't forthcoming, hence their problems. Residential investors have 25 year loan terms, so their 'refinancing problem' is in the far future.

I'd agree with you drawing parallels between LOE and the big boys funding distributions via revaluing assets.

In many countries in the world and through much of history where there isn't belief in magical capital gains from the equity fairy, real estate is positively geared due to compensation for risk and effort.

But we're not investing in those countries or time periods. We're investing in the 'here & now', not the environment we wish we were in. If it gets to be +ve geared then we'll take advantage of that environment, ATM we're taking advantage of rising rents.

Disposable income has been rising at around 6%pa for around 25 years - that coincides with the rises we've had in res IP. I'd suggest you put together a spreadsheet showing CPI rising at 3%pa & wages rising at 4%pa and see what discretionary income is left over, and how fast it rises.... and then think about what people will spend that extra income on.

 

[want2bewealthy]

I dont know about you but negative gearing is DEFINITELY worth it in my eyes,

A/ It gives me lots back in depreciation and holding costs,

B/ It beats paying off your own mortgage which is non deductible plus tennants are paying for the majority.

C/ I like to stay slightly negatively geared for now while building up my portfolio, I like to sit on the edge of neutral because I still get a few thou back at tax time and dont have to pay any tax, sure pos gearing is good but I like to take advantage of negative while Im still earning good wages and dont need an extra income, Ill save that for when I retire at 40

 

[troyhunt]

My accountant suggested that but I like the idea of having a lump sum payment each year so i can either pay it off my PPOR or invest in other areas.

Why not put it into the PPOR monthly? $8k paid in monthly lots and reinvested at 8% will put you around $300 better off at the end of the year than getting it all in one go

BTW, actually, it's probably more given the delay between end of year, lodging a return then having the money hit your account. Food for thought!